Top 5 legal mistakes many startups make

Startups are accustomed to operating in lean and quick fashion, so in the interest of “speed to market” they often do not have the luxury (or expense) of having legal advisors review their practices. Here, however, are great examples of when/where it is critically important to do so:

Entity Creation

When deciding to start a business it is important to consider the form of entity and the agreement structure between any owners. Many of our clients elect to use an LLC structure because it is easy to start, is flexible and provides potential tax preferred treatment and personal liability protection. An LLC is also easy to set up and does not have a lot of administrative requirements. However, depending upon a number of factors, that may or may not be the correct entity for you.

Operating Agreements

Owners of an LLC (or any other entity) should draft an Operating Agreement (or the proper agreement for different entity types) to determine the rights and responsibilities of each owner. This type of document is a good idea because it helps address how to deal with potential conflicts before they arise. In many cases an LLC can be sufficient for the long term. However, if your company plans to receive investment funds from corporations or sophisticated investors then a different form of entity (C-Corporation) may be more desirable.

Non-Disclosure Agreements

When starting a business and discussing your business plan, ideas or strategies with other people, it is important to protect anything that may be confidential to you. The best way to accomplish this is to use a Non Disclosure Agreement, or NDA. It is important to have a party sign a comprehensive NDA before you disclose any confidential information to them. There are a few different types of NDAs, unilateral and mutual. A unilateral NDA is used if one party is the sole or primary source of delivering confidential information. A mutual NDA is more appropriate if both parties will be exchanging information that it considers to be confidential.

Consultant/Employment Agreements

When using employees or consultants in your business it is important to sign agreements with each party. These agreements help protect your confidential information and intellectual property. They also outline the scope of work to be provided and length of engagement.

Lease Agreements

When signing a lease or any other agreement for office space, it is critical to have an attorney review the documentation. Lease agreements are often long and contain poorly written clauses that only benefit a landlord. While many of these terms may never be litigated, there is a lot of leeway in the boilerplate documentation to improve the terms before the document is executed.

In short, an outside attorney can help a startup early on to avoid painful and costly mistakes by crafting clear and simple documentation to outline the basics of a simple understanding or agreement. These documents do not have to be expensive and most times, the value of having an agreement in place far exceeds the cost of documentation.